Nidhi Aggarwal and Susan Thomas
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The implementation of co-location in securities
markets world-wide has caused wide-spread concerns
among regulators globally about whether different
sets of traders have different access to
markets. Further, policy makers are concerned that
when there is such a variation in access, the
quality of markets will decrease on average. In
this policy paper, we examine this question in
detail, by summarising the work done on testing
this proposition in global exchanges, and
quantitatively analysing the proposition in the
Indian equity market at NSE. The NSE provides data
that helps to identify the answer to these
questions in a unique manner where every order is
tagged by whether it has been generated by an
algorithm and where every trade indicates whether
an algorithmic trader was a buyer or a seller. In
the paper, we find that the Indian equity markets
are increasingly becoming dominated by algorithmic
trading; that this has not prevented the
non-algorithmic trader from being able to generate
a large number of trades (and therefore
participate in the price discovery process); that
algorithmic traders do not flee the market when
there is market stress with the Emkay Crash
being a case study; and that market quality of
stocks where there is greater algorithmic trading
intensimproves compared to stocks that
algorithmic traders do not prefer to trade. Given
that higher algorithmic trading is better for the
overall market, policy research needs to next
focus on how to ensure that there is more
algorithmic trading focus more uniformly across
all stocks in the market compared to a subset of
the stocks. |